Settlement negotiations in relation to contract disputes usually contemplate that the parties will finalise their agreement to resolve the dispute by execution of a Deed of Settlement and Release.

However, great care needs to be taken during these discussions as a string of recent decisions have shown that the courts may find that the dispute has been settled by ‘agreement’ reached during the settlement negotiations, despite the fact that the formal written deed is not yet executed. This ‘agreement’ can easily come about from the settlement discussions, emails and conduct of the parties.

This issue is particularly relevant if you want to withdraw from a settlement as it may be that the settlement discussions have come too far and you are already committed without knowing it.

The Gailey Projects decision

The most recent example of the judicial trend towards recognising agreements without a written deed is the decision by the Queensland Supreme Court inGailey Projects Pty Ltd v McCartney & Anor[2017] QSC 185.

The proceedings involved a dispute concerning a consultancy agreement between the plaintiff and the second defendant, and the plaintiff’s subsequent entitlement to payment and a share of the development profits of a residential development at Albion in Brisbane.

On the first day of a two-week trial in the Supreme Court of Queensland, the parties requested that the trial judge stand the matter down in order to continue settlement negotiations. The trial judge granted an indulgence for further negotiations and requested that the parties inform him of any developments in the dispute. On the afternoon of 31 July 2017, the parties’ solicitors and their respective counsel entered into negotiations.

Course of the negotiations

In the present case, all of the five legal representatives at negotiations gave evidence as to the events of the afternoon. Flanagan J accepted the following recount of events.

After multiple offers during settlement negotiations, the defendant made an offer of $450,000 and a call option over a 2-bedroom unit in the development. It was established that the plaintiff’s counsel said words to the effect of ‘we have a deal’, and the offer was deemed to be accepted through the conduct and communication of the parties.

Further discussions ensued and the defendant’s solicitors agreed that the payment would be made within 24 hours to the plaintiff. The plaintiff was also free to select his 2-bedroom unit from the remaining ‘four to six’ apartments available in the development. The plaintiff’s solicitor questioned the possibility of obtaining a unit with a carpark. The number of apartments available for selection, and the option of a car parking space, was later raised as an issue at trial by the plaintiff.

The defendant was insistent on the plaintiff not owning the unit, nor transferring it to a ‘related entity’, as he did not want the plaintiff to be involved in the Body Corporate in any way. As such, both parties concluded that a call option was most suitable in relation to the transfer of the unit to avoid double transfer duty.

Later that evening, the defendant’s solicitor emailed the plaintiff’s solicitor with specific details as to the agreement. This became known as the ‘7.53pm email’. The plaintiff subsequently rejected the email as not adequately reflecting the agreement made during the negotiations and commenced proceedings in the Supreme Court on the basis that the agreement was not binding.

When is a contract binding?

There are four circumstances where a court will recognise a binding contractual relationship, being:

The parties have reached agreement on terms and intend to be immediately bound, but propose to have the terms restated in a form which will be more precise,

The parties have agreed on terms, however the performance of the terms is conditional upon the execution of a formal document,

The parties clearly are not bound unless and until a formal contract has been executed, or

The parties are to be bound immediately but expect to enter into a formal document at a later date which contains additional terms.

Negotiations that fall in the first, second and fourth categories will be binding.

Supreme Court’s judgment

In applying the above categories the Supreme Court found that there had been a “concluded agreement to compromise” at the completion of negotiations. The court found that the agreement was not repudiated by the defendant’s email later that evening nor was the agreement unenforceable because of the operation of sections 11(1)(a) and 59 of theProperty Law Act 1974(Qld). Accordingly, it rejected the plaintiff’s argument that the agreement was only enforceable upon the execution of a written deed of settlement.

In reaching this conclusion, the court responded to each of the following three issues.

Did the parties have an intention to create legal relations?

The Supreme Court cited the recent decision inAJ Lucas Operations Pty Ltd v Gladstone Area Water Board and Anor[ii]which stated that in determining whether there was an intention to be bound, “the communications alleged to constitute the agreement must be considered in light of the other exchanges and not in isolation”[iii]. The Court concluded that there were a number of factors which evinced an intention to be bound, including that settlement negotiations were conducted by Senior Counsel, that negotiations took place on the first day of a trial in order to avoid a lengthy litigation process and the contemplation of acts which were to be carried out within 24 hours of discussions.

Were there material terms which were yet to be agreed or were uncertain?

The plaintiff alleged that the parties had not agreed on six matters that had been specified in the '7.53pm email', including the time within which the option was to be exercised, the price for the call option and the time in which the $450,000 was to be paid.

The court formed the view that the parties had not failed to agree on these terms.

Was any agreement to compromise intended to be conditional upon execution of a deed of settlement?

The Supreme Court found that the parties did not make their agreement conditional upon being reduced to writing in a formal Deed of Settlement. Again, the court invoked the decision in AJ Lucas,stating that whether or not the parties intended to be bound by a deed depended on the effect of their oral exchange on that day. Flanagan J concluded that the parties were negotiating for an immediate compromise of proceedings and the purpose of the emails was to set out what had already been agreed. This was in line with the ‘fourth category’ of Masters v Cameronwhich stipulates that even when a document recording the terms of an agreement specifically refers to the later execution of a formal contract, the parties may be immediately bound.

On the basis of finding that there was a concluded agreement, the court then responded to the following two issues put forward by the plaintiff:

Was the agreement to compromise repudiated by the email of 7.53pm?

In order to establish a repudiation, it must be evident that a party evinced an intention to no longer be bound by the contract[iv]. Flanagan J dismissed the plaintiff’s submission that the proposal of materially different terms in the 7.53pm email constituted proof of a refusal to perform the agreement to compromise. Rather the email was seen to be a record of the terms that had been agreed upon by the parties during settlement negotiations earlier that day.

Is the agreement unenforceable because of the operation of sections 11(1)(a) and 59 of the Property Law Act?

Sections 11(1)(a) and 59 of the PLA stipulate that an interest in land cannot be created or disposed of, and no action may be brought upon any contract for sale, except in writing and signed by a person authorised to do so. The court rejected the plaintiff’s submission that the call option had the effect of creating an interest in land. Flanagan J accepted the decision inNateau Investments[v] which drew a distinction between an agreement to compromise and a binding contract for the sale of land. The former does not require the execution of written documentation concerning the creation, or transfer of interest in land.

Judicial trend

In the earlier case ofAJ Lucas Operations Pty Ltd v Gladstone Area Water Board & Anor[vi], the Queensland Court of Appeal found that settlement negotiations for the termination of a joint project for the construction of water and sewerage pipelines had formed a binding contract between the parties. In that case, the CEO of AJ Lucas signed a Final Deed by facsimile following settlement negotiations that had taken place that day. After it had been signed, AJ Lucas requested further amendments to the deed which was refused by the other party. As a result, AJ Lucas subsequently contended that no binding agreement had been made.

The court rejected AJ Lucas’ argument, noting that the actions of the parties evinced an intention to be bound. In this case, only one party had signed the Final Deed at the point in time where the court held that the contract was binding. The deed did not contain any requirement that there could be no acceptance without an exchange of counterparts and as such, the agreement was binding[vii].

On the contrary, in the case ofFeldman v GNM Australia Ltd[viii], the court failed to find a binding agreement between the two parties. The case was centred on settlement negotiations over a defamation claim against The Guardian newspaper by Rabbi Yosef Feldman. In negotiations, emails were sent between the solicitors of the two parties. Solicitors for Rabbi Feldman later advised that their client had withdrawn his offer to settle the matter. The respondents argued that the parties had a concluded settlement agreement, despite not executing a formal deed. As a contract will fail for incompleteness if an essential or important term is not agreed, the court found no binding agreement had been reached. There was no correspondence to suggest that the parties either expressly or impliedly intended to be bound immediately[ix], failing to meet the first category ofMasters v Cameron,nor did the correspondence evince an intention to be bound by terms in the emails but with a view to clarifying further terms in a later written deed, thus failing the fourth category[x].

Advice when negotiating

The decision inGailey Projectsis a timely reminder of the dangers in settlement negotiations. The clear take-outs from the case are:

Expressly state your intention

to be bound through the negotiations once agreement is reached (whether or not the Deed is signed); or

not to be bound unless and until the Deed is executed

When negotiating ensure the terms of any agreement (which are at risk of not being subject to a subsequent deed) are clear and specific and settled on by both parties.